The U.S. housing recovery could run out of steam in 2014. Banks are likely to tighten lending standards once new rules come into place. Rising interest rates may drive down home loan volume, too. Cash purchases by investors could set a floor for house prices, but they may not be enough to prevent a major slowdown.
Of late, the market has been on a tear. American home prices in the third quarter of 2013 rose 11 percent compared with the same period a year earlier, the S&P/Case-Shiller index shows. That’s the strongest jump since the bubble popped six years ago. Foreclosure activity, meanwhile, has fallen to 2005 levels, according to online marketplace RealtyTrac. And existing home sales have been the best since 2007, with over 5 million on an annualized basis since May, reports the National Association of Realtors (NAR).
But Washington appears poised to throw cold water on the fiery recovery. In January, the so-called Qualified Mortgage rule goes live. It piles strict new standards on lenders who want to avoid borrower lawsuits. That could shrink home loan credit from the current level that is already lower than before the boom.
Congress may even make some reforms to mortgage finance next year, possibly laying out the funeral plan for guarantors Fannie Mae and Freddie Mac. Both lawmaking chambers are pondering bills, and outgoing Senate Banking Committee Chairman Tim Johnson needs some legacy legislation.
Meanwhile, demand for mortgages is likely to shrink, too. That’s because long-term interest rates are on the verge of rising after years of the U.S. Federal Reserve holding them artificially low. Not only will that lead to a slump in borrowers refinancing their existing home loans – a business that already dropped in 2013. It will also dissuade some from buying a new home.
It’s not looking totally bleak. Since mid-2010 all-cash purchases, mostly by investors like Blackstone, have made up 30 percent of all existing home sales, according to the NAR. That’s more than three times its historical norm. That may prevent house prices plummeting, but it’s of little comfort to the average buyer.